Falling commodity prices and a rising dollar threaten to wipe almost $2 billion from the West Australian and Queensland budgets, plunging the resources growth engines into deficit.

NSW and South Australian revenues will also take a large hit, due to weaker than expected royalty streams, and the rest of the nation will be caught up in the downswing as the size of the pool of GST revenue shrinks.

Analysis by The Australian Financial Review has found a rapidly deteriorating iron ore price and stronger than expected exchange rate will leave WA with an almost certain deficit in 2012-13, despite forecasts of a $196 million surplus.

WA Treasury will calculate the damage ahead of the mid-year review in December – it uses a formula that averages iron ore and currency prices for the six weeks prior – that is on track to wipe $1.2 billion from this year’s forecasts even if commodity prices enjoy a modest recovery.

“It would be fair to say at the moment that both are working against the state’s finances and we are having to constantly monitor within government our spending and of course our revenue streams," he said. “It is taking up a fairly big chunk of my time and a fairly big chunk of Treasury’s time but certainly it is the case that notwithstanding the aggregate growth of the Western Australian economy that state finances are under pressure."

In Queensland, the Newman government is facing a royalties shortfall of more than $500 million this financial year, after hard-coking and thermal coal prices plummeted since the last budget update.

The government is expected to reveal its revenue shortfall in the September 11 budget. It is also expected to increase coal royalties for the first time since 2008 to help reach its $4 billion savings target over the next few years. WA will receive $300 million less than budgeted if currency exchange rates remain at around $US1.04. May forecasts assumed the dollar would average out at US99¢ in 2012-13, leaving a 5¢ differential to recent prices.(For every 1¢ rise, WA loses about $60 million in revenue because exports are worth less as the Australian dollar strengthens.)

Related Quotes

Company Profile

Iron ore prices are more problematic. Even on an optimistic view, where prices push back towards the $US100 a tonne mark, WA coffers would be stripped of almost $900 million.(For every $US1 fall, royalties drop by about $33 million.)

The May budget assumes iron ore prices would average out at $US127 for 2012-13, more than 25 per cent higher than current prices. As 2012-13 operating budgets are now being spent, it is near impossible for WA to take any sizeable measures to counter the lower-than-expected royalty streams, save for a rapid turnaround in commodity prices or favourable currency movements.

Bank of America Merrill Lynch economist
Saul Eslake
said it was rare for commodity prices and the exchange rate to work against state economies at the same time. “It’s unusual and clearly it’s a big negative," he said. “In the longer term, the shortfall will also be distributed to the other states via the GST system."

UBS estimates that WA’s budget revenue is $150 million lower than expected after the first two months of the financial year. UBS calculates the expected shortfall at $1.5 billion for the financial year.

Only a dramatic turnaround could stem the anticipated shortfall for WA. If iron ore prices recovered to average $US110 for the year and the dollar hit Treasury’s forecast of 99¢, the shortfall would be about $560 million.

However, WA and Queensland will receive some compensation through a larger share of future GST carve-ups because they would no longer be such dominant revenue-earners.

As WA coffers take a hit by iron ore price movements, those states that are more reliant on royalties generated from coal operations are in a similar predicament.

Queensland Resources Council chief Michael Roche said there had been a big fall in coal prices since the last budget update in January. “There’s no doubt prices fell away in the balance of last financial year," he said.“If you are relying on prices as they are today then you’d expect royalties to be down again this financial year."

The June budget was delayed until September 11 because of the March election. It also allowed a few extra months for Newman government ministers to find savings to help turn around the state’s finances.

The last official Treasury update on the state’s finances was in January where assumption of future prices were based on higher prices for both thermal and metallurgical coal.

Since the budget update in January, hard coking coal prices have dropped from about $235 a tonne to $170 a tonne, a fall of 40 per cent. Thermal coal has fallen from highs of $124 a tonne to $80 a tonne now, a 55 per cent plunge.

NSW forecasts assume ongoing growth in the value of coal sales and a gradual depreciation of the Australian dollar against the US. NSW Treasurer
Mike Baird
said several factors were affecting royalties, including the type of coal, volume, currency exchange and coal prices.

“We are very early in our budget cycle and whilst there has been a shortfall in our expectations as a result of market movements, any revisions to budget forecasts will be detailed in our half-yearly review in December," Mr Baird said. Unlike WA, NSW does not disclose commodity and currency assumptions.

South Australia has been hit with several pieces of bad news recently, as falling commodity prices and the suspension of plans to expand BHP Billiton’s Olympic Dam project affect both current and future revenue streams.